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Why GSX Techedu Stock Skyrocketed 48.6% Last Month

By Keith Noonan – Aug 10, 2020 at 9:44AM

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Despite allegations of fraud, the online education stock has soared 340% this year.

What happened

Shares of GSX Techedu (GOTU -0.78%) rose 48.6% in July, according to data from S&P Global Market Intelligence. The Chinese online education company's stock appears to have gotten a boost from continued coronavirus-related tailwinds.

^SPX Chart

^SPX data by YCharts.

GSX Techedu saw steep sell-offs in May as a result of accusations from firms including Muddy Waters Research and Grizzly Research that the education-technology company was fraudulently inflating its revenue and user engagement numbers. GSX has since published refutations of these claims, and its shares went on to post significant gains in June and July amid reports of new confirmed coronavirus cases in China.

A child using a computer.

Image source: Getty Images.

So what

Conditions created by the pandemic have led to increased demand for online education services, and reports of new infections seem to have prompted many investors to overlook allegations of fraud levied at GSX. There wasn't much in the way of business-specific news for the company last month, but its stock appears to have benefited from signs of a favorable operating backdrop and closed out July at a new lifetime high. 

Now what

GSX stock has continued to rally in August's trading. Shares are up roughly 8% in the month so far. 

GSX Chart

GSX data by YCharts.

China's online education industry has huge room for growth, and GSX has been posting impressive results. But investors also have to keep in mind the company's valuation and the risk that there may be some merit to the fraud allegations.

GSX has a market capitalization of roughly $23 billion and trades at roughly 96 times this year's expected earnings and 22.5 times expected sales. Those are lofty multiples to begin with, and the company's stock looks like a very high-risk investment amid uncertainties created by class-action lawsuits and investigations related to the alleged reporting fraud. 

Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Gaotu Techedu Inc. Stock Quote
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